What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-04 compared with 2021-05-05 · 261 added, 188 removed, 379 unchanged (54% of the section changed)

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the impact of the results of the recent U.S.

elections on the regulatory landscape, capital markets, and the response to and management of the COVID-19 pandemic, including the effectiveness of already-enacted fiscal stimulus from the federal government and a potential infrastructure bill;

elections on the regulatory landscape, natural resource extraction industries, capital markets, and the response to and management of the COVID-19 pandemic, including the effectiveness of previously-enacted fiscal stimulus from the federal government and a potential infrastructure bill;

the timing of Paycheck Protection Program ("PPP") loan forgiveness;

the impact of interest rates, inflation, trade policies and tensions, including tariffs, and potential geopolitical instability;

the general condition of, and changes in, the Alaska economy;

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Allowance for Credit Losses Policy:

The Company's Executive Loan Management Committee and Asset Liability Committee are both involved in monitoring various aspects of the Company's allowances for credit losses ("ACL")

The Company's Executive Loan Management Committee and Asset Liability Committee are both involved in monitoring various aspects of the Company's allowances for credit losses ("ACL") methodology.

The Company's Audit Committee provides board oversight of the ACL process and reviews and approves the ACL methodology on a quarterly basis.

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Management leverages economic projections from a reputable and independent third-party to inform its loss driver forecasts over the Company's four quarter forecast period.

Management utilizes and forecasts Alaska unemployment as a loss driver for all of the loans pools that utilized the DCF method.

Management utilizes and forecasts Alaska unemployment as a loss driver for all of the loans pools that utilize the DCF method.

Management also utilizes and forecasts either one-year percentage change in the Alaska home price index or the one-year percentage change in the national commercial real estate price index as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses.

Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.

Following the forecast period, the economic variables used to calculate PD revert to a historical average at a constant rate over an 8 quarter reversion period.

Following the forecast period, the economic variables used to calculate PD revert to a historical average at a constant rate over an eight quarter reversion period.

Other assumptions relevant to the discounted cash flow model to derive the quantitative allowance include the LGD, which is the estimate of loss for a defaulted loan, prepayment speeds, and the discount rate applied to future cash flows.

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Update on Economic Conditions

2020 was a challenging year for the global economy as the COVID-19 pandemic and related governmental policies related to its mitigation led to significant disruption in normal business activity.

Management believes that it is counter-intuitive to have a year where payroll jobs declined by 7% and real gross state product ("GSP") fell 4.9% in Alaska, yet per capita income rose over 3% and housing prices and sales activity increased substantially.

This was only possible because billions of dollars of federal stimulus money reached Alaska and helped support businesses and individuals through the most challenging times.

Record low interest rates and low levels of building activity also contributed to home price increases in Alaska.

Oil prices were shocked much lower at the beginning of 2020 at the height of the virus fears and low level of travel activity.

However, as the year progressed, oil prices returned to a more stable level and oil production levels in Alaska also followed a similar path.

February 2021 employment data from the Alaska Department of Labor ("DOL") shows a 7% reduction in total payroll jobs, a decline of 22,300 compared to February of 2020.

Leisure and hospitality was hit hard, down 23% year over year, a loss of 7,300 jobs.

Direct Oil and Gas jobs fell 38% or 3,900 jobs.

A decline in public education positions led to a 2,000 job decrease in local government, according to the DOL.

Transportation, Warehousing and Utilities declined 9% or 1,800 jobs since last February.

Professional and Business Services has also been negatively impacted, down 6% or 1,600 fewer positions over the past year.

According to the DOL report, State Government was the only sector to grow year over year.

The 1% or 200 job increase was attributed to hiring people for contact tracing and to process unemployment insurance claims.

The level of jobless claims reported by the DOL in the middle of February were 3.75 times higher than the same week in 2020.

Alaska’s GSP was $52.1 billion in 2020, compared to $54.7 billion in 2019, according to the Federal Bureau of Economic Analysis ("BEA") in a preliminary report released on March 26, 2021.

GDP declined 3.5% for 2020.

The Alaska economy began to recover from the effect of the pandemic in the fourth quarter of 2020, and Alaska’s real Gross State Product ("GSP") continued to increase in the first quarter of 2021.

The Alaska Department of Labor ("DOL") has released data through May of 2021.

They report total payroll jobs have grown 16,500 from May of 2020.

This is a total of 305,000 jobs or an improvement of 5.7% over the prior 12 months.

Tourism related jobs were the hardest hit from travel restrictions and have also been the fastest to recover.

According to the DOL, the Leisure and Hospitality sector added 6,000 jobs between May of 2020 and May of 2021.

However, this is still 9,900 jobs less than May of 2019.

Oil and Gas direct jobs continued to decline in the last 12 months, down 1,400 jobs to 6,100 in May of 2021.

This is the only major sector to have fewer jobs than May of 2020.

Construction has recovered more than half of the 1,300 job decline from two years ago, adding 700 jobs since May of 2020.

Health Care and Manufacturing, which is primarily seafood processing, have now surpassed the total number of jobs seen two years ago in May of 2019 according to the DOL report.

Alaska’s GSP was $52.1 billion in 2020, compared to $54.7 billion in 2019, according to the Federal Bureau of Economic Analysis ("BEA").

Alaska’s reduction was 4.9% and the worst state was Hawaii at 8%.

Based on the report, both states were more negatively affected by travel restrictions reducing tourism.

2020 was very erratic due to COVID-19’s impact on the economy.

According to the BEA, Alaska’s GSP declined by 6% and 34% in the first two quarters of the year and then grew 32% and 6% in the third and fourth quarters of 2020 at a seasonally adjusted annualized rate.

This is very similar to the nationwide averages for the U.S.

which saw a decline of 5% and 31% in the first two quarters of 2020, and then increased 33% and 4% in third and fourth quarters.

Both states were more negatively affected by travel restrictions reducing tourism.

GDP declined 3.5% in 2020.

Alaska’s largest GSP declines in 2020 came from Transportation and Warehousing, followed by Accommodation and Food Services, Oil & Gas and Health Care.

All of these sectors showed positive recovery in the 4th quarter of 2020 in Alaska, helping place it 9th fastest growing for the quarter of the 50 U.S.

Alaska’s seasonally adjusted personal income for 2020 was $47.4 billion compared to $46 billion in 2019, according to a report released by the BEA on March 24, 2021.

All of these sectors showed positive recovery in the fourth quarter of 2020 in Alaska, helping place it ninth fastest growing for the quarter of the 50 U.S.

Alaska’s real GSP growth continued in the first quarter of 2021, increasing 5.4% on an annualized basis, according to a June 25, 2021 BEA report.

Alaska’s seasonally adjusted personal income for 2020 was $47.4 billion compared to $46 billion in 2019, according to the BEA.

Personal income in the U.S.

in 2020 increased 6.1% and Alaska rose 3.1%.

Per capita income in the U.S.

was $59,729 compared to $64,780 in Alaska, according to the BEA.

This places Alaska as the ninth highest per capita income of the 50 U.S.

In a typical year, the majority of personal income is derived from wage earnings.

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Personal income is further supported by earnings from dividends, interest and rents.

However, in 2020 earnings from wages and investments decreased in the U.S.

The growth in personal income in the U.S.

was primarily from a net $1.1 trillion increase in government transfer payments.

However, in 2020 earnings from wages and investments decreased $500 million in Alaska according to the BEA's report.

The growth in personal income came predominantly from a $1.9 billion increase in government transfer payments.

About half of the transfer payment increase was from unemployment insurance.

Direct stimulus payments accounted for a large part of the remainder.

Per capita income in the U.S.

was $59,729 compared to $64,780 in Alaska, according to the BEA.

This places Alaska as the 9th highest income of the 50 U.S.

In Alaska, earnings from wages decreased 1.5% or $435 million in 2020 and investment income fell 0.7% or $65 million.

Government transfer payments rose 24.2% or $1.9 billion over 2019 levels.

By far the largest drop in wage earnings came in Accommodations and Food Services, followed by State and Local Government and Oil & Gas.

There were positive increases in wages in the Professional and Technical Services Industry and Health Care.

Alaska North Slope (“ANS”) crude oil had monthly average prices in 2018 and 2019 ranging from $58.86 to $80.03 a barrel.

ANS began 2020 at $65.48.

Prices fell quickly at the beginning of 2020, responding to fears that COVID-19 would

devastate the global economy and reduce the demand for travel.

The low month was April when ANS averaged $16.54 a barrel.

However, by June the oil markets stabilized and for the last six months the average monthly price remained between $40.42 and $50.32.

Thus far in 2021, the monthly average price was $55.56, $61.88 and $65.60 in January, February and March, respectively.

Alaska’s crude oil production averaged 485,300 barrels per day (“bpd”) in fiscal year (“FY”) 2020, which ended in June.

This was a decrease of 4.8% compared to the previous FY end.

Total output declined 1.2% in FY 2018 and 4.5% in FY 2019.

The State Department of Revenue forecasts production on the North Slope to increase by 0.7% in FY 2021 to 488,900 bpd.

The production average for the month of March 2021 was 494,176 bpd.

In February of 2021 there was an average of 495,076 bpd and 498,176 bpd in January.

Prices fell quickly at the beginning of 2020, responding to fears that COVID-19 would devastate the global economy and reduce the demand for travel.

The low month was April of 2020, when ANS averaged $16.54 a barrel.

However, by June of last year the oil markets stabilized and for the last six months of 2020 the average monthly price remained between $40.42 and $50.32.

In the first six months of 2021 ANS prices continued to rise.

The monthly average price was $55.56 in January of 2021.

It rose to $65.60 in March, and $73.18 in June of 2021.

Alaska’s home mortgage delinquency and foreclosure levels continue to be better than most of the nation.

According to the Mortgage Bankers Association, Alaska’s foreclosure rate was 0.45% at the end of 2020, compared to 0.49% in the third quarter 2020.

This was an improvement from 0.63% at the end of 2019.

The comparable national average rate was slightly higher than Alaska at 0.56% at the end of 2020, 0.59% in the third quarter of 2020, and 0.78% at the end of 2019.

We believe that the foreclosure rates are somewhat misleading because the federal moratorium on foreclosure activity on occupied homes led to declining foreclosure numbers, even though job losses strained the economy and borrowers' ability to pay.

The Mortgage Bankers Association survey reported that the percentage of delinquent mortgage loans at the end of 2020 in Alaska was 6.21%, down considerably from 6.78% at the end of September 2020.

However, this is significantly higher than 2.85% at the end of 2019 before the effects of COVID-19 impacted the market.

The comparable delinquency rate for the entire country was higher than Alaska at 7.19% at the end of 2020, compared to 7.6% in the third quarter of 2020, and 4.07% at the end of 2019.

Management believes that many people across the country took advantage of mortgage forbearance plans available from lenders to delay payments or pay interest only on their homes.

Until these borrowers catch up on past due payments these loans will appear delinquent because they are still behind according to the original terms of the mortgage.

According to the Mortgage Bankers Association, Alaska’s foreclosure rate improved from 0.63% at the end of 2019 to 0.45% at the end of 2020.

In the first quarter of 2021 the foreclosure rate improved again slightly to 0.41%.

The comparable national average rate was higher than Alaska at 0.54% in the first quarter of 2021.

Management believes that the foreclosure rates are somewhat misleading because the federal moratorium on foreclosure activity on occupied homes led to declining foreclosure numbers, even though job losses strained the economy and borrowers' ability to pay.

The Mortgage Bankers Association survey reported that the percentage of delinquent mortgage loans at the end of 2019 in Alaska was 2.9%.

This increased to 6.2% at the end of 2020 after the effects of COVID-19 impacted jobs.

In the first quarter of 2021, it has improved to 5.4% in Alaska.

According to the survey, the comparable delinquency rate for the entire country remains higher than Alaska at 6.1% in the first quarter of 2021.

According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 5.9% in 2020 to $396,779.

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These two markets represent where the vast majority of the Bank’s residential building activity occurs.

The number of units sold in Anchorage was up significantly in 2020 by 19.5%, climbing from 2,719 homes sold in 2019 to 3,249 last year.

The average sales price for the first six months of 2021 is 8% higher in Anchorage and 14.8% higher in the Matanuska Susitna Borough than the 12 month average of 2020.

The number of units sold in Anchorage was up significantly in 2020 by 19.5%, climbing from 2,719 homes sold in 2019 to 3,250 last year as reported by the Alaska Multiple Listing Services.

The main difference was a record number of sales occurred in the last quarter of the year, when sales activity typically declines in the winter.

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The Matanuska Susitna Borough also had stronger than normal sales in the second half of 2020.

We believe that the low interest rate environment has been a major factor.

In the first six months of 2021 there have been 1,567 home sales in Anchorage, or 30.3% more than in the first six months of 2020.

The Matanuska Susitna Borough had 998 sales in the first half of 2021, an increase of 25.2% over the same time period in 2020.

We believe that the low interest rate environment has been a major factor in the increase in home sales.

According to the Federal Reserve Bank of St.

Louis, the average 30 year fixed rate mortgage in the U.S.

hit all-time record lows last year.

Rates began 2020 at 3.72% in the first week of January and fell more than a percent to 2.67% in the last week of December 2020.

Rates have begun to rise in the first quarter of 2021 and finished March at 3.18%.

hit an all-time record low last year.

Rates began 2020 at 3.7% in the first week of January and fell one percent to 2.7% by the end of the year.

Rates began to rise in the first quarter of 2021 and finished March at 3.2%.

However, in the second quarter of 2021 they declined to slightly under 3%.

COVID-19 Issues:

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Northrim has identified various industries that may be adversely impacted by the COVID-19 pandemic and the significant decline in oil prices.

Though the industries affected may change through the progression of the pandemic, the following sectors for which the Company has exposure, as a percent of the total loan portfolio as of March 31, 2021 are being impacted:

Healthcare (6%), Tourism (5%), Oil and Gas (4%), Aviation (non-tourism) (4%), Accommodations (2%), Retail (2%) and Restaurants (2%).

Healthcare (6%), Tourism (5%), Oil and Gas (4%), Aviation (non-tourism) (4%), Accommodations (2%), Retail (2%), Fishing (3%), and Restaurants (3%).

The Company's exposure as a percent of the total loan portfolio excluding U.S.

Small Business Administration ("SBA") PPP loans as of March 31, 2021 are:

Healthcare (8%), Tourism (7%), Oil and Gas (6%), Aviation (non-tourism) (5%), Accommodations (3%), Retail (3%) and Restaurants (3%).

Small Business Administration ("SBA") PPP loans as of June 30, 2021 are:

Healthcare (8%), Tourism (7%), Oil and Gas (5%), Aviation (non-tourism) (5%), Accommodations (3%), Retail (3%), Fishing (3%), and Restaurants (3%).

• Customer Accommodations:

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The outstanding principal balance of loan modifications due to the impacts of COVID-19 were as follows:

Loan Modifications due to COVID-19 as of March 31, 2021

Loan Modifications due to COVID-19 as of June 30, 2021

(Dollars in thousands) Interest Only Full Payment Deferral Total

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Number of modifications 23 11 34

Consumer loans represent 1% of total loan modifications identified above.

Of the $88.3 million and 30 loan modifications as of March 31, 2021, approximately $83.2 million and 26 loans have entered into a second modification.

Of the $83.1 million and 24 loan modifications as of June 30, 2021, approximately $64.0 million and 22 loans have entered into a second modification.

• Branch Operations:

No branch operations are limited as a result of COVID-19, while a number of customer and employee safety measures continue to be implemented.

As of June 30, 2021, no branch operations are limited as a result of COVID-19, while a number of customer and employee safety measures continue to be implemented.

• Remote Workers:

As of March 31, 2021, approximately 39% of the Company's employees are working remotely either on a full- or part-time basis directly due to the pandemic caused by COVID-19.

As of June 30, 2021, approximately 31% of the Company's employees are working remotely either on a full- or part-time basis directly due to the pandemic caused by COVID-19.

These employees primarily hold non-customer facing positions within the Company.

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• Growth and Paycheck Protection Program:

• Over the last twelve months, Northrim funded a total of 5,025 PPP loans totaling $579.6 million to both existing and new customers.

Of this amount, 2,125 loans totaling $204 million were originated during the first quarter of 2021 through the second round of PPP funding.

• As of March 31, 2021, the second round of PPP resulted in 459 new customers totaling $21.3 million in PPP loans, no non-PPP loans, and $10.4 million in new deposit balances.

• PPP round one and two has resulted in 1,844 new customers, with non-PPP loan balances of $26.6 million and deposit balances of $97.4 million as of March 31, 2021.

• Management estimates that we funded approximately 27% of the number and 34% of the value of all Alaska PPP loans for the quarter ending March 31, 2021.

• As of March 31, 2021, Northrim customers had received forgiveness through the SBA on 1,704 PPP loans totaling $170.1 million, of which 1,167 PPP loans totaling $105 million were forgiven in the first quarter of 2021.

• Over the last fifteen months, Northrim funded a total of nearly 5,800 PPP loans totaling $612.6 million to both existing and new customers.

Of this amount, 745 loans totaling $33 million were originated during the second quarter of 2021 and 2,125 loans totaling $204.0 million were originated during the first quarter of 2021, through the second round of PPP funding.

• As of June 30, 2021, PPP has resulted in 2,340 new customers totaling $40 million in non-PPP loans, and $83 million in new deposit balances.

• Management estimates that we funded approximately 24% of the number and 32% of the value of all Alaska PPP second round loans as of June 30, 2021.

• As of June 30, 2021, Northrim customers had received forgiveness through the SBA on 2,321 PPP loans totaling $303 million, of which 617 PPP loans totaling $133 million were forgiven in the second quarter of 2021, and 1,167 PPP loans totaling $105 million were forgiven in the first quarter of 2021.

Of the PPP loans forgiven in the second quarter of 2021, 81 loans totaling $2.2 million related to PPP round two.

• The Company initially utilized the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF") to fund PPP loans, but paid back those funds in full during the second quarter of 2020 and has since funded the SBA PPP loans through core deposits and maturity of long-term investments.

• Capital Management:

At March 31, 2021, the capital ratios of the Company and Northrim Bank (the "Bank") were well in excess of all regulatory requirements.

During the first quarter of 2021, the Company repurchased 61,399 shares of common stock at an average price of $36.02.

Highlights and Summary of Performance - First Quarter of 2021

The Company reported net income and diluted earnings per share of $12.2 million and $1.94, respectively, for the first quarter of 2021 compared to net income and diluted earnings per share of $1.0 million and $0.16, respectively, for the first quarter of 2020.

The increase in net income for the three-month period ending March 31, 2021 compared to the same period last year is attributable to significant increases in net income in both the Home Mortgage Lending segment, as a result of increased production, and in the Community Banking segment for a variety of reasons, which are discussed below.

• Total revenue in the first quarter of 2021, which includes net interest income plus other operating income, increased 60% to $35.4 million from $22.1 million in the first quarter a year ago, primarily due to a $9.0 million increase in mortgage banking income.

• Net interest income increased 24% to $19.5 million in the first quarter of 2021 compared to the same period in 2020 mainly due to increased loans and loans held for sale balances and fees on PPP loans.

• Net interest margin decreased to 3.90% in the first quarter of 2021 as compared to 4.32% in the first quarter a year ago primarily due to lower interest rates.

• The Company booked a benefit for credit losses of $1.5 million for the three-month period ending March 31, 2021, compared to a provision of $2.1 million in the same period in 2020.

Highlights and Summary of Performance - Second Quarter of 2021

The Company reported net income and diluted earnings per share of $8.3 million and $1.33, respectively, for the second quarter of 2021 compared to net income and diluted earnings per share of $9.9 million and $1.52, respectively, for the second quarter of 2020.

The Company reported net income and diluted earnings per share of $20.5 million and $3.27, respectively, for the first six months of 2021 compared to $10.9 million and $1.68, respectively, for the same period in 2020.

The decrease in net income for the three-month period ending June 30, 2021 compared to the same period last year is primarily attributable to a decrease in net income in the Home Mortgage Lending segment, as a result of decreased production.

The increase in net income for the six-month period ending June 30, 2021 compared to the same period last year is attributable to increases in net income in the Home Mortgage Lending segment, as a result of increased production in the first quarter of 2021 compared to 2020, and increased net income in the Community Banking segment mostly due to fee income from PPP loans and a reduction in the provision for credit losses.

• Total revenue in the second quarter of 2021, which includes net interest income plus other operating income, decreased 5% to $33.3 million from $35.0 million in the second quarter a year ago, primarily due to a $3.9 million decrease in mortgage banking income which was only partially offset by a $1.7 million increase in net interest income.

• Net interest income increased 10% to $19.2 million in the second quarter of 2021 compared to the same period in 2020 mainly due to increased loan balances and fees on PPP loans.

• Net interest margin decreased to 3.48% in the second quarter of 2021 as compared to 3.98% in the second quarter a year ago primarily due to lower interest rates and a change in the mix of earning assets.

These decreases were only partially offset by fees on PPP loans.

• The Company booked a benefit for credit losses of $427,000 for the three-month period ending June 30, 2021, compared to a provision of $404,000 in the same period in 2020.

The provision for the current quarter was recorded using the CECL accounting standard and reflects expected lifetime credit losses on loans and off-balance sheet unfunded loan commitments.

The decrease in the provision for loan credit loss in the first quarter of 2021 is primarily the result of improvement in economic assumptions used to estimate lifetime credit losses, which was only partially offset by an increase in the provision for unfunded commitments resulting from increased balances.

• The Company paid cash dividends of $0.37 per common share in the first quarter of 2021, up 9% from $0.34 in the first quarter of 2020.

The decrease in the provision for loan credit loss in the second quarter of 2021 compared to the same quarter in 2020 is primarily the result of improvement in economic assumptions used to estimate lifetime credit losses.

• The Company paid cash dividends of $0.37 per common share in the second quarter of 2021, up 9% from $0.34 in the second quarter of 2020.

• At June 30, 2021, the capital ratios of the Company and Northrim Bank (the "Bank") were well in excess of all regulatory requirements.

During the second quarter of 2021, there were no shares repurchased under the previously announced share repurchase program.

Other financial measures are shown in the table below:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Return on average assets, annualized 1.42 % 2.04 % 1.80 % 1.23 %

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Nonperforming assets:

Nonperforming assets, net of government guarantees at March 31, 2021 increased $3.2 million, or 20% to $19.5 million as compared to $16.3 million at December 31, 2020.

OREO, net of government guarantees, increased $274,000 to $6.3 million at March 31, 2021 as compared to $6.0 million at December 31, 2020 due to the addition of one OREO property in the first quarter of 2021.

Nonperforming loans, net of government guarantees increased $3.0 million during the first three months of 2021 as compared to December 31, 2020, primarily due to the addition of two relationships in the first three months of 2021.

$10.4 million, or 53% of nonperforming assets are nonaccrual loans related to seven commercial relationships.

Nonperforming assets, net of government guarantees at June 30, 2021 increased $1.5 million, or 9% to $17.8 million as compared to $16.3 million at December 31, 2020.

OREO, net of government guarantees, decreased $216,000 to $5.8 million at June 30, 2021 as compared to $6.0 million at December 31, 2020 due to the sale of one property in the second quarter of 2021 which was only partially offset by the addition of one OREO property in the first quarter of 2021.

Nonperforming loans, net of government guarantees increased $2.0 million, or 20% to $12 million as of June 30, 2021 from $10 million as of December 31, 2020, primarily due to the addition of two relationships in the first three months of 2021 which were only partially offset by payoffs and paydowns in the second quarter of 2021.

$9.5 million, or 54% of nonperforming assets at June 30, 2021, are nonaccrual loans related to six commercial relationships.

While it is too early to determine the effect that the COVID-19 pandemic will ultimately have on our non-performing assets, significant increases may occur in subsequent quarters.

The following table summarizes nonperforming asset activity for the three-month periods ending March 31, 2021 and 2020.

The following table summarizes nonperforming asset activity for the three-month periods ending June 30, 2021 and 2020.

Writedowns Transfers to

(In Thousands) Balance at December 31, 2020 Additions this quarter Payments this quarter /Charge-offs

(In Thousands) Balance at March 31, 2021 Additions this quarter Payments this quarter /Charge-offs

this quarter Transfers to OREO Performing Status

this quarter Sales this quarter Balance at March 31, 2021

this quarter Sales this quarter Balance at June 30, 2021

Nonperforming loans $14,463 $173 ($1,422) ($110) $— $— $— $13,104

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Writedowns Transfers to

(In Thousands) Balance at December 31, 2019 Additions this quarter Payments this quarter /Charge-offs

(In Thousands) Balance at March 31, 2020 Additions this quarter Payments this quarter /Charge-offs

this quarter Transfers to OREO/REPO Performing Status

this quarter Sales this quarter Balance at March 31, 2020

this quarter Sales this quarter Balance at June 30, 2020

Nonperforming loans $15,074 $1,563 ($773) ($804) ($695) $— $— $14,365

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Repossessed assets 231 695 (7) — — — — 919

Nonperforming purchased receivables — 1,226 — — — — — 1,226

Other real estate owned guaranteed

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These loans are closely monitored and their performance is reviewed by management on a regular basis.

At March 31, 2021, management had identified potential problem loans of $1.4 million as compared to potential problem loans of $6.1 million at December 31, 2020.

The decrease in potential problem loans from December 31, 2020 to March 31, 2021 is primarily the result of one $3.9 million relationship moving to nonaccrual as well as paydowns to existing potential problem loans in the first quarter of 2021.

At June 30, 2021, management had identified potential problem loans of $5.4 million as compared to potential problem loans of $6.1 million at December 31, 2020.

The decrease in potential problem loans from December 31, 2020 to June 30, 2021 is primarily the result of one $3.9 million relationship moving to nonaccrual as well as paydowns and credit risk upgrades to existing potential problem loans in the first six months of 2021 which were only partially offset by additions to potential problem loans in the first six months of 2021.

Troubled debt restructurings (“TDRs”):

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Interest on TDRs will be accrued at the restructured rates when it is anticipated that no loss of original principal will occur, and the interest can be collected, which is generally after a period of six months.

The Company had $2.4 million in loans classified as TDRs that were performing and $4.2 million in TDRs included in nonaccrual loans at March 31, 2021 for a total of approximately $6.5 million.

There are $1.5 million in government guarantees associated with TDRs, so total TDRs, net of government guarantees, are $5.0 million at March 31, 2021.

The Company had $2.3 million in loans classified as TDRs that were performing and $3.9 million in TDRs included in nonaccrual loans at June 30, 2021 for a total of approximately $6.2 million.

There are $2.5 million in government guarantees associated with TDRs, so total TDRs, net of government guarantees, are $3.8 million at June 30, 2021.

At December 31, 2020 there were $832,000 in loans classified as TDRs, net of government guarantees that were performing and $4.5 million in TDRs included in nonaccrual loans for a total of $5.3 million.

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Income Statement

Net income for the first quarter of 2021 increased $11.1 million to $12.2 million as compared to $1.0 million for the same period in 2020.

The increase in net income is attributable to significant increases in net income in both the Home Mortgage Lending segment, as a result of increased production, and in the Community Banking segment for a variety of reasons, which are discussed below.

Net income for the second quarter of 2021 decreased $1.6 million to $8.3 million as compared to $9.9 million for the same period in 2020.

The decrease in net income is attributable to a $2.3 million decrease in net income in the Home Mortgage Lending segment, which is primarily due to lower production that was only partially offset by a $662,000 increase in net income in the Community Banking segment.

The increase in net income in the Community Banking segment in the three months ended June 30, 2021, as compared to the same period a year ago is primarily due an increase in net interest income from PPP fees and a decrease in the provision for credit losses, and these changes were only partially offset by an increase in the provision for income taxes.

Net income for the first six months of 2021 increased $9.6 million to $20.5 million as compared to $10.9 million for the same period in 2020.

The increase in net income is attributable to a $7.0 million increase in net income in the Community Banking segment due an increase in net interest income from PPP fees and a decrease in the provision for credit losses, and similar to the second quarter comparison discussed above, these changes were only partially offset by an increase in the provision for income taxes.

Net income in the Home Mortgage Lending segment increased $2.6 million in the first six months of 2021 as compared to the same period in 2020, primarily due to increases in production and net mortgage servicing income.

Net Interest Income/Net Interest Margin

Net interest income for the first quarter of 2021 increased $3.8 million, or 24%, to $19.5 million as compared to $15.7 million for the first quarter of 2020.

Net interest margin decreased 42 basis points to 3.90% in the first quarter of 2021 as compared to 4.32% in the first quarter of 2020.

The increase in net interest income in the first quarter of 2021 compared to the same periods of 2020 was primarily the result of higher interest income on loans due in large part to full recognition of the deferred PPP loan fees upon loan forgiveness through the SBA.

During the first quarter of 2021, Northrim received $105.0 million in loan forgiveness through the SBA, compared to none in the first quarter of 2020, resulting in total net PPP fee income of $3.3 million.

As of March 31, 2021, there was $3.1 million of net PPP fee income from round one remaining and $8.8 million remaining from round two for total net deferred fees on PPP loans of $11.9 million.

The decrease in net interest margin in the first quarter of 2021 as compared to the same period a year ago was primarily the result of the reduction in short-term interest rates in 2020 and the impact of the PPP loans on the resulting yields in the loan portfolio.

Changes in net interest margin in the three months ended March 31, 2021 as compared to the same period in the prior year are detailed below:

Three Months Ended March 31, 2021 vs.

March 31, 2020

Net interest income for the second quarter of 2021 increased $1.7 million, or 10%, to $19.2 million as compared to $17.5 million for the second quarter of 2020.

Net interest margin decreased 50 basis points to 3.48% in the second quarter of 2021 as compared to 3.98% in the second quarter of 2020.

Net interest income for the first half of 2021 increased $5.5 million, or 17%, to $38.7 million as compared to $33.1 million for the first half of 2020.

The increase in net interest income in the second quarter and first six-months of 2021 compared to the same periods of 2020 was primarily the result of higher average earning asset balances, an increase in loan fee income due in large part to full recognition of the deferred PPP loan fees upon loan forgiveness through the SBA, and reduced interest expense.

During the three and six-month periods ending June 30, 2021, Northrim received $133.0 million and $238 million, respectively, in loan forgiveness through the SBA compared to none in the same periods in 2020.

Total net PPP fee income including accretion and full fee recognition upon loan forgiveness was $2.6 million and $5.9 million during the three and six-month periods ending June 30, 2021, respectively, compared to $1.3 million in both the three and six-month periods ending June 30, 2020.

PPP fee income for 2020 included only fee accretion.

As of June 30, 2021, there was $1.0 million of net PPP fee income from round one remaining and $10.0 million remaining from round two for total net deferred fees on PPP loans of $11.0 million.

The decrease in net interest margin in the second quarter and first six months of 2021 as compared to the same periods a year ago was primarily the result of lower interest rates and a less favorable mix of earning assets due to significant increases in short-term investments, which is the lowest yielding type of earning asset for the Company.

Changes in net interest margin in the three and six-month periods ended June 30, 2021 as compared to the same period in the prior year are detailed below:

Three Months Ended June 30, 2021 vs.

June 30, 2020

Nonaccrual interest adjustments 0.01 %

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Change in net interest margin (0.50) %

Six Months Ended June 30, 2021 vs.

June 30, 2020

Nonaccrual interest adjustments 0.02 %

Impact of SBA Paycheck Protection Program loans 0.14 %

Interest rates and loan fees (0.41) %

Volume and mix of interest-earning assets (0.21) %

Change in net interest margin (0.46) %

Components of Net Interest Margin

The following table compares average balances and rates as well as margins on earning assets for the three-month periods ended March 31, 2021 and 2020:

(Dollars in Thousands) Three Months Ended March 31,

The following table compares average balances and rates as well as margins on earning assets for the three-month periods ended June 30, 2021 and 2020:

(Dollars in Thousands) Three Months Ended June 30,

Interest income/

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1 Interest income includes loan fees.

Loan fees recognized during the period and included in the yield calculation totaled $4.1 million and $847,000 in the first quarter of 2021 and 2020, respectively.

Loan fees recognized during the period and included in the yield calculation totaled $3.4 million and $2.0 million in the second quarter of 2021 and 2020, respectively.

2 Nonaccrual loans are included with a zero effective yield.

Average nonaccrual loans included in the computation of the average loan balances were $11.2 million and $15.0 million in the first quarter of 2021 and 2020, respectively .

Average nonaccrual loans included in the computation of the average loan balances were $13.8 million and $14.6 million in the second quarter of 2021 and 2020, respectively .

3 Consists of interest bearing deposits in other banks.

4 Consists of investment in debt securities available for sale, equity securities, investment securities held to maturity, and investment in Federal Home Loan Bank stock.

The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the three-month periods ending March 31, 2021 and 2020.

Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rates:

(In Thousands) Three Months Ended March 31, 2021 vs.

(In Thousands) Three Months Ended June 30, 2021 vs.

Increase (decrease) due to

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Total interest expense $349 ($835) ($486)

The following table compares average balances and rates as well as margins on earning assets for the six-month periods ended June 30, 2021 and 2020:

(Dollars in Thousands) Six Months Ended June 30,

Interest income/

Average Balances Change expense Change Average Yields/Costs

2021 2020 $ % 2021 2020 $ % 2021 2020 Change

$1,517,438 $1,200,870 $316,568 26 % $36,842 $31,503 $5,339 17 % 4.90 % 5.28 % (0.38) %

Loans held for sale 112,897 80,925 31,972 40 % 1,545 1,310 235 18 % 2.76 % 3.26 % (0.50) %

Short-term investments 3

164,712 59,762 104,950 176 % 99 267 (168) (63) % 0.12 % 0.90 % (0.78) %

Long-term investments 4

326,671 270,284 56,387 21 % 2,363 3,263 (900) (28) % 1.46 % 2.43 % (0.97) %

Total investments 491,383 330,046 161,337 49 % 2,462 3,530 (1,068) (30) % 1.01 % 2.15 % (1.14) %

Interest-earning assets 2,121,718 1,611,841 509,877 32 % 40,849 36,343 4,506 12 % 3.88 % 4.53 % (0.65) %

Nonearning assets 171,870 180,316 (8,446) (5) %

Total $2,293,588 $1,792,157 $501,431 28 %

Interest-bearing demand $516,228 $350,308 $165,920 47 % $246 $320 ($74) (23) % 0.10 % 0.18 % (0.08) %

Savings deposits 314,709 238,009 76,700 32 % 255 413 (158) (38) % 0.16 % 0.35 % (0.19) %

Money market deposits 251,140 210,288 40,852 19 % 225 421 (196) (47) % 0.18 % 0.40 % (0.22) %

Time deposits 179,778 173,096 6,682 4 % 1,102 1,661 (559) (34) % 1.24 % 1.93 % (0.69) %

Total interest-bearing deposits 1,261,855 971,701 290,154 30 % 1,828 2,815 (987) (35) % 0.29 % 0.58 % (0.29) %

Borrowings 25,066 47,769 (22,703) (48) % 336 381 (45) (12) % 2.70 % 1.60 % 1.10 %

Total interest-bearing liabilities 1,286,921 1,019,470 267,451 26 % 2,164 3,196 (1,032) (32) % 0.34 % 0.63 % (0.29) %

Demand deposits and other noninterest-bearing liabilities 772,548 566,284 206,264 36 %

Equity 234,119 206,403 27,716 13 %

Total $2,293,588 $1,792,157 $501,431 28 %

Net interest income $38,685 $33,147 $5,538 17 %

Net interest margin 3.68 % 4.14 % (0.46) %

Average loans to average interest-earning assets 71.52 % 74.50 %

Average loans to average total deposits 76.27 % 80.62 %

Average non-interest deposits to average total deposits 36.57 % 34.77 %

Average interest-earning assets to average interest-bearing liabilities 164.87 % 158.11 %

1 Interest income includes loan fees.

Loan fees recognized during the period and included in the yield calculation totaled $7.6 million and $2.9 million in the first six months of 2021 and 2020, respectively.

2 Nonaccrual loans are included with a zero effective yield.

Average nonaccrual loans included in the computation of the average loan balances were $12.2 million and $14.7 million in the first six months of 2021 and 2020, respectively .

3 Consists of interest bearing deposits in other banks.

4 Consists of investment in debt securities available for sale, equity securities, investment securities held to maturity, and investment in Federal Home Loan Bank stock.

The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the six-month periods ending June 30, 2021 and 2020.

Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rates:

(In Thousands) Six Months Ended June 30, 2021 vs.

Increase (decrease) due to

Volume Rate Total

Interest Income:

Loans $9,724 ($4,385) $5,339

Loans held for sale 386 (151) 235

Short-term investments 500 (668) (168)

Long-term investments 1,697 (2,597) (900)

Total interest income $12,307 ($7,801) $4,506

Interest Expense:

Interest-bearing deposits $1,745 ($2,732) ($987)

Borrowings (445) 400 (45)

Total interest expense $1,300 ($2,332) ($1,032)

Provision for Credit Losses

The Company adopted ASU 2016-13 effective January 1, 2021.

The provision for credit loss expense is the amount of expense that, based on our judgment, is required to maintain the ACL at an appropriate level under CECL.

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The following table presents the major categories of credit loss expense:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(In Thousands) 2021 2020 2021 2020

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Total credit loss expense ($427) $404 ($1,915) $2,464

The decrease in the provision for credit losses on loans is primarily the result of improvement in economic assumptions used to estimate lifetime credit losses.

The increase in the provision for credit losses on unfunded commitments is primarily due to an increase in total unfunded commitments, which was only partially offset by lower lifetime expected loss rates due to improvement in economic assumptions.

As noted above, the provision for credit losses was recorded in accordance with CECL in 2021.

The provision for credit losses in 2020, prior to adoption of CECL, was recorded under the incurred loss model.

Despite the fact that two different methodologies were used in the calculation of the provision for credit losses in 2021 versus 2020, in general the decrease in the provision for credit losses on loans for the three and six-month periods ending June 30, 2021 as compared to the same periods in 2020 is primarily the result of improvement in economic assumptions used to estimate credit losses.

The ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, as well as loan portfolio composition, quality, and duration.

Other Operating Income

Other operating income for the three-month period ended March 31, 2021, increased $9.5 million, or 147%, to $15.9 million as compared to $6.4 million for the same period in 2020, primarily due to the $9.0 million increase in mortgage banking income in the first quarter of 2021 compared to the same quarter in 2020.

This increase in mortgage banking income in the three-month period ended March 31, 2021 as compared to the same period in 2020 was primarily due to increased refinance activity and home purchases due to changes in the mortgage interest rates.

Also, changes in the fair value mark-to-market of the marketable equity securities portfolio decreased other income by $84,000 in the first quarter of 2021 as compared to $871,000 in the first quarter of 2020.

Additionally, the Company recognized $92,000 in interest rate swap fee income in the first quarter of 2021.

Other operating income for the three-month period ended June 30, 2021, decreased $3.4 million, or 19%, to $14.1 million as compared to $17.5 million for the same period in 2020, primarily due to a $3.9 million decrease in mortgage banking income in the second quarter of 2021 compared to the same quarter in 2020.

The decrease in mortgage banking income in the three-month period ended June 30, 2021 as compared to the same period in 2020 was primarily due to decreased refinance activity due to changes in the mortgage interest rates that was only partially offset by increased mortgages for home purchases.

Additionally, there was a decrease in purchased receivable income due to customers reportedly using PPP funds instead of selling receivables.

These decreases were only partially offset by an increase in bankcard fees due to lower transaction volume in the second quarter of 2020 resulting from quarantine restrictions related to the COVID-19 pandemic, an increase in service charges on deposits due to customer accommodations related to the impacts of COVID-19 that lowered service changes on deposits in the second quarter of 2020, and an increase in interest rate swap income.

Other operating income for the six-month period ended June 30, 2021, increased $6.1 million, or 25%, to $30.0 million as compared to $24.0 million for the same period in 2020, primarily due to a $5.1 million increase in mortgage banking income in the second half of 2021 compared to the same period in 2020.

The increase in mortgage banking income in the six-month period ended June 30, 2021 as compared to the same period in 2020 was primarily due to increased home purchase activity that was only partially offset by lower refinance activity due to changes in the mortgage interest rates.

Additionally, there was a $94,000 unrealized gain on marketable securities recognized in the first half of 2021 compared to a $722,000 unrealized loss in the same period in 2020.

Bankcard fees, service charges on deposits, and interest rate swap income also increased in the first half of 2021 compared to 2020 due to the cessation of COVID-19 quarantine restrictions and higher transaction volume as compared to the same period in 2020.

These increases were only partially offset by a decrease in purchased receivable income due to customers reportedly using PPP funds instead of selling receivables.

Other Operating Expense

Other operating expense for the first quarter of 2021 increased $2.5 million, or 14%, to $21.3 million as compared to the same period in 2020 primarily due to higher salaries and other personnel expense and other miscellaneous operating expenses related to mortgage banking operations, which fluctuate with production volumes.

The provision for income taxes for the first quarter of 2021 increased $3.1 million, or 1,286%, as compared to the same period in 2020.

The increase in the three-month period ending March 31, 2021 as compared to the same period in 2020 was primarily due to the increase in pretax income.

The effective tax rate increased to 22% in the three-month period ending March 31, 2021 as compared to 19% in the same period in 2020.

The increased rate in three-month period ending March 31, 2021 was primarily due to decreased tax credits and tax exempt interest income as a percentage of net income.

Other operating expense for the second quarter of 2021 decreased $338,000, or 1%, to $22.3 million as compared to the same period in 2020 primarily due to lower salaries and other personnel expense related to mortgage banking operations, which fluctuate with production volumes.

This decrease was only partially offset by an increase in occupancy expense as a result of miscellaneous repairs and maintenance and tenant improvements at several of the Company's locations and data processing expense.

Other operating expense for the first half of 2021 increased $2.2 million, or 5%, to $43.7 million from $41.5 million for the same period in 2020 primarily due to higher salaries and other personnel expense related to mortgage banking operations, which fluctuate with production volumes.

Additionally, data processing and occupancy expenses increased in the first half of 2021 as compared to 2020 due to miscellaneous repairs and maintenance, IT maintenance and services, and tenant improvements at several of the Company's locations.

For the second quarter and first half of 2021, Northrim recorded a higher effective tax rate as compared to the same periods in 2020 as a result of a decrease in tax credits and tax exempt interest income as a percentage of pre-tax income in 2021, as well as the reversal of a $454,000 accrual of tax expense in the second quarter of 2020.

In the second quarter of 2021, Northrim recorded $3.1 million in state and federal income tax expense for an effective tax rate of 26.9%, compared to $3.4 million, or 21.7% in the first quarter of 2021 and $2.0 million, or 16.9% in the second quarter a year ago.

For the first half of 2021, Northrim recorded $6.4 million in state and federal income tax expense, for an effective tax rate of 23.9% compared to $2.3 million and 17.1% for the same period in 2020.

FINANCIAL CONDITION

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Portfolio Investments

Portfolio investments at March 31, 2021 increased 25%, or $66.6 million, to $333.3 million from $266.7 million at December 31, 2020 as proceeds from an increase in deposits that were not lent out were invested in the first three months of 2021.

Portfolio investments, which include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at June 30, 2021 increased 38%, or $100.1 million, to $366.8 million from $266.7 million at December 31, 2020 as proceeds from an increase in deposits that were not lent out were invested in the first six months of 2021.

The table below details portfolio investment balances by portfolio investment type:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Dollar Amount Percent of Total Dollar Amount Percent of Total

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The following table presents the concentration distribution of the loan portfolio, net of deferred fees and costs, as of the dates indicated:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Dollar Amount Percent of Total Dollar Amount Percent of Total

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Total loans $1,487,968 $1,444,050

Loans increased by $104.9 million, or 7%, to $1.549 billion at March 31, 2021 from $1.444 billion at December 31, 2020, primarily as a result of increased commercial loans due to the Company's participation in the SBA PPP.

PPP loans are included in commercial and industrial loans in the table below and totaled $402.5 million at March 31, 2021 and $304.6 million at December 31, 2020.

Commercial real estate loans increased $18.9 million, or 3% during the same period.

As shown in the table above, 1-4 family residential construction loans, other construction loans, and obligations of states and political subdivisions also increased in the first quarter of 2021 while the remaining loan segments decreased slightly, as compared to year end 2020.

Management believes that the significant outreach that the Company has done throughout the SBA PPP lending cycle to both customers and non-customers has contributed to growth in our market share for non-PPP lending relationships.

Loans increased by $43.9 million, or 3%, to $1.488 billion at June 30, 2021 from $1.444 billion at December 31, 2020, primarily as a result of increased commercial real estate loans.

Commercial real estate loans increased $45.7 million, or 7% during the six-month period ending June 30, 2021.

As shown in the table above, 1-4 family residential construction loans, obligations of states and political subdivisions, and agriculture production, including commercial fishing also increased in the first six months of 2021 while the remaining loan segments decreased slightly, as compared to year end 2020.

Management believes that the significant outreach that the Company has done throughout the SBA PPP lending cycle to both existing customers and new PPP loan customers has contributed to growth in our market share for non-PPP lending relationships.

PPP loans are included in commercial and industrial loans in the table above and totaled $300.9 million at June 30, 2021 and $304.6 million at December 31, 2020.

Information about loans directly exposed to the oil and gas industry

The Company defines "direct exposure" to the oil and gas industry as companies that it has identified as significantly reliant upon activity related to the oil and gas industry, such as oilfield services, lodging, equipment rental, transportation, and other logistic services specific to the industry.

The Company estimates that $64.7 million, or approximately 4% of loans as of March 31, 2021 have direct exposure to the oil and gas industry as compared to $65.1 million, or approximately 4% of loans as of December 31, 2020.

The Company's exposure as a percent of the total loan portfolio excluding SBA PPP loans as of March 31, 2021 and December 31, 2020 was 6%.

The Company has no loans to oil producers or exploration companies as of March 31, 2021 or December 31, 2020, but the totals noted include a loan related to construction of an oil drilling rig.

The balance of this loan was $2.9 million and $3.0 million at March 31, 2021 and December 31, 2020, respectively, and is classified as an Asset Quality Rating ("AQR") system pass loan in both periods.

The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $67.5 million and $63.5 million at March 31, 2021 and December 31, 2020, respectively.

The portion of the Company's ACL that related to the loans with direct exposure to the oil and gas industry was estimated at $1.5 million as of March 31, 2021 and $1.2 million as of December 31, 2020.

The Company estimates that $65.0 million, or approximately 4% of loans as of June 30, 2021 have direct exposure to the oil and gas industry as compared to $65.1 million, or approximately 4% of loans as of December 31, 2020.

The Company's exposure as a percent of the total loan portfolio excluding SBA PPP loans as of June 30, 2021 was 5% and as of December 31, 2020 was 6%.

The Company has no loans to oil producers or exploration companies as of June 30, 2021 or December 31, 2020, but the totals noted include a loan related to construction of an oil drilling rig.

The balance of this loan was $6.7 million and $3.0 million at June 30, 2021 and December 31, 2020, respectively, and is classified as an Asset Quality Rating ("AQR") system pass loan in both periods.

The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $67.3 million and $63.5 million at June 30, 2021 and December 31, 2020, respectively.

The portion of the Company's ACL that related to the loans with direct exposure to the oil and gas industry was estimated at $1.4 million as of June 30, 2021 and $1.2 million as of December 31, 2020.

The following table details loan balances by loan segment and class of financing receivable for loans with direct oil and gas exposure as of the dates indicated:

(In Thousands) March 31, 2021 December 31, 2020

(In Thousands) June 30, 2021 December 31, 2020

Commercial & industrial loans $45,492 $41,016

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Supplemental information about significant COVID-19 exposure on directly impacted industries

At March 31, 2021, the Company had $80.0 million, or 5% of portfolio loans, in the tourism sector, $57.6 million, or 4% of portfolio loans, in the aviation (non-tourism) sector, $91.4 million, or 6% of total loans, in the healthcare sector, $29.1 million, or 2%, in retail loans and $35.5 million, or 2% in the restaurant sector, and $37.8 million, or 2% in the accommodations sector.

At March 31, 2021, the Company had $80.0 million, or 7% of portfolio loans excluding SBA PPP loans, in the tourism sector, $57.6 million, or 5% of portfolio loans excluding SBA PPP loans, in the aviation (non-tourism) sector, $91.4 million, or 8% of total loans excluding SBA PPP loans, in the healthcare sector, $29.1 million, or 3% of total loans excluding SBA PPP loans, in retail loans and $35.5 million, or 3% of total loans excluding SBA PPP loans in the restaurant sector, and $37.8 million, or 3% of total loans excluding SBA PPP loans in the accommodations sector.

The portion of the Company's ACL that related to the loans with exposure to these industries is estimated at the following amounts as of March 31, 2021:

(In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Restaurant Accommodations Total

At June 30, 2021, the Company had $93.7 million, or 6% of portfolio loans, in the healthcare sector, $82.3 million, or 5% of portfolio loans, in the tourism sector, $57.8 million, or 4% of portfolio loans, in the aviation (non-tourism) sector, $40.8 million, or 3% in the restaurant sector, $37.9 million, or 3% of portfolio loans, in the fishing sector, $36.3 million, or 2% of portfolio loans, in the retail sector, and $36.4 million, or 2% of portfolio loans, in the accommodations sector.

At June 30, 2021, the Company had $93.7 million, or 8% of total loans excluding SBA PPP loans, in the healthcare sector, $82.3 million, or 7% of portfolio loans excluding SBA PPP loans, in the tourism sector, $57.8 million, or 5% of portfolio loans excluding SBA PPP loans, in the aviation (non-tourism) sector, $40.8 million, or 3% of total loans excluding SBA PPP loans in the restaurant sector,

$37.9 million, or 3% of total loans excluding SBA PPP loans, in the fishing sector, $36.4 million, or 3% of total loans excluding SBA PPP loans in the accommodations sector, and $36.3 million, or 3% of total loans excluding SBA PPP loans, in retail loans.

The portion of the Company's ACL that related to the loans with exposure to these industries is estimated at the following amounts as of June 30, 2021:

(In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Fishing Restaurant Accommodations Total

ACL $940 $591 $1,046 $352 $348 $450 $376 $4,103

The following table sets forth information regarding changes in the ACL for the periods indicated:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(In Thousands) 2021 2020 2021 2020

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Consumer loans — — — —

Other loans — — — 14

Total charge-offs 110 804 273 969

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and revolving secured by 1-4 family first liens 10 11 20 20

Obligations of states and political subdivisions in the US — — 20 20

Agricultural production, including commercial fishing 7 7 — —

Consumer loans — 1 15 15

Other loans — — 2 6

Total recoveries 46 36 253 70

Net, (recoveries) charge-offs (44) 131

Net, charge-offs 64 768 20 899

(Benefit) provision for credit losses (161) 404 (2,066) 2,464

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The following table sets forth information regarding changes in the ACL for unfunded commitments for the periods indicated:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(In Thousands) 2021 2020 2021 2020

2 unchanged sentences

Adjusted balance, beginning of period 1,833 159 1,416 152

Provision for credit losses 417 7

(Benefit) provision for credit losses (266) 8 151 15

Balance at end of period $1,567 $167 $1,567 $167

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Deposits are the Company’s primary source of funds.

Total deposits increased $226.3 million, or 12%, to $2.051 billion as of March 31, 2021 compared to $1.825 billion as of December 31, 2020.

This increase is primarily due to funding PPP loans, but is also due to new customer relationships as a result of the Company's significant PPP efforts during the first quarter of 2021 and the last nine months of 2020.

Total deposits increased $321.5 million, or 18%, to $2.146 billion as of June 30, 2021 compared to $1.825 billion as of December 31, 2020.

This increase is primarily due to funding PPP loans, but is also due to new customer relationships as a result of the Company's significant PPP efforts during the first six months of 2021 and the last nine months of 2020.

The following table summarizes the Company's composition of deposits as of the periods indicated:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(In thousands) Balance % of total Balance % of total

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Total deposits $2,146,438 $1,824,981

The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 91% of total deposits at March 31, 2021 and 90% of total deposits at December 31, 2020.

The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 91% of total deposits at June 30, 2021 and 90% of total deposits at December 31, 2020.

The only deposit category with stated maturity dates is certificates of deposit.

At March 31, 2021, the Company had $184.6 million in certificates of deposit as compared to certificates of deposit of $175.6 million at December 31, 2020.

At March 31, 2021, $135.0 million, or 73%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $175.6 million, or 73%, of total certificates of deposit at December 31, 2020.

The aggregate amount of certificates of deposit in amounts of $100,000 and greater at March 31, 2021 and December 31, 2020, was $143.2 million and $133.3 million, respectively.

The following table sets forth the amount outstanding of deposits in amounts of $100,000 and greater by time remaining until maturity and percentage of total deposits as of March 31, 2021:

At June 30, 2021, the Company had $184.8 million in certificates of deposit as compared to certificates of deposit of $175.6 million at December 31, 2020.

At June 30, 2021, $128.6 million, or 70%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $175.6 million, or 73%, of total certificates of deposit at December 31, 2020.

The aggregate amount of certificates of deposit in amounts of $100,000 and greater at June 30, 2021 and December 31, 2020, was $144.7 million and $133.3 million, respectively.

The following table sets forth the amount outstanding of deposits in amounts of $100,000 and greater by time remaining until maturity and percentage of total deposits as of June 30, 2021:

Time Certificates of Deposit

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Total $144,670 100 %

There were no depositors with deposits representing 10% or more of total deposits at March 31, 2021 or December 31, 2020.

There were no depositors with deposits representing 10% or more of total deposits at June 30, 2021 or December 31, 2020.

The Bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB").

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FHLB advances are dependent on the availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Bank’s assets.

At March 31, 2021, our maximum borrowing line from the FHLB was $1.050 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements.

The Company has outstanding advances of $14.7 million as of March 31, 2021 which were originated to match fund low income housing projects that qualify for long term fixed interest rates.

At June 30, 2021, our maximum borrowing line from the FHLB was $1.097 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements.

The Company has outstanding advances of $14.7 million as of June 30, 2021 which were originated to match fund low income housing projects that qualify for long term fixed interest rates.

These advances have original terms of either 18 or 20 years with 30 year amortization periods and fixed interest rates ranging from 1.23% to 3.25%.

Federal Reserve Bank:

The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $80.8 million of loans as collateral to secure advances made through the discount window on March 31, 2021.

There were no discount window advances outstanding at March 31, 2021 or December 31, 2020, respectively.

The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $77.7 million of loans as collateral to secure advances made through the discount window on June 30, 2021.

There were no discount window advances outstanding at June 30, 2021 or December 31, 2020, respectively.

Other Short-term Borrowings:

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or $816.9 million at March 31, 2021 and $736.0 million at December 31, 2020.

At March 31, 2021 and December 31, 2020, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or $852.9 million at June 30, 2021 and $736.0 million at December 31, 2020.

At June 30, 2021 and December 31, 2020, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.

Long-term Borrowings.

The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of March 31, 2021 or December 31, 2020.

The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of June 30, 2021 or December 31, 2020.

Liquidity and Capital Resources

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The primary sources of demands on our liquidity are customer demands for withdrawal of deposits and borrowers' demands that we advance funds against unfunded lending commitments.

Our total unfunded commitments to fund loans and letters of credit at March 31, 2021 were $375.7 million.

Our total unfunded commitments to fund loans and letters of credit at June 30, 2021 were $393.9 million.

We do not expect that all of these loans are likely to be fully drawn upon at any one time.

Additionally, as noted above, our total deposits at March 31, 2021 were $2.051 billion.

As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 "Financial Statements" of this report, net cash provided by operating activities was $44.6 million for the first three months of 2021, primarily due to cash provided by proceeds from the sale of loans held for sale, which were only partially offset by cash used in connection with the origination of loans held for sale.

Net cash used by investing activities was $178.7 million for the same period, primarily due to increases in loans, in particular PPP loans, as well as purchases of available for sale securities.

Additionally, as noted above, our total deposits at June 30, 2021 were $2.146 billion.

As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 "Financial Statements" of this report, net cash provided by operating activities was $68.5 million for the first six months of 2021, primarily due to cash provided by proceeds from the sale of loans held for sale, which were only partially offset by cash used in connection with the origination of loans held for sale.

Net cash used by investing activities was $152.0 million for the same period, primarily due to purchases of available for sale securities and an increase in loans.

This use of cash was only partially offset by proceeds from the maturities and calls of securities available for sale.

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As customers withdraw funds from deposit accounts that were obtained from the Company via PPP loans, the Company may need to borrow funds to meet an immediate liquidity need.

At March 31, 2021, our funds available for borrowing under our existing lines of credit were $1.116 billion.

Additionally, the Company can obtain additional nonrecourse borrowings under the Federal Reserve Bank's newly created PPPLF as a source of additional liquidity in order to meet liquidity needs created by the origination of PPP loans without excessive usage of the Company's other existing liquidity sources.

The Company had $349.9 million in PPP loans eligible to be pledged for the PPPLF program as of March 31, 2021.

The Company has not obtained any other new borrowing lines or other new sources of liquidity other than the PPPLF program resulting from anticipated liquidity challenges from COVID-19.

At June 30, 2021, our funds available for borrowing under our existing lines of credit were $1.161 billion.

Additionally, the Company could have obtained additional nonrecourse borrowings under the Federal Reserve Bank's PPPLF until July 30, 2021, as a source of additional liquidity in order to meet liquidity needs created by the origination of PPP loans without excessive usage of the Company's other existing liquidity sources.

The Company had $292.3 million in PPP loans eligible to be pledged for the PPPLF program as of June 30, 2021.

The Company has

not obtained any other new borrowing lines or other new sources of liquidity other than the PPPLF program resulting from anticipated liquidity challenges from COVID-19.

Given these sources of liquidity and our expectations for customer demands for cash and for our operating cash needs, we believe our sources of liquidity to be sufficient to fund our ongoing operating activities and our anticipated capital requirements for at least 12 months.

The Company issued 17,308 shares of its common stock in the first three months of 2021 and repurchased 61,399 shares of its common stock under the Company's previously announced repurchase program.

At March 31, 2021, the Company had 6,206,913 shares of its common stock outstanding.

The Company issued 17,308 shares of its common stock in the first six months of 2021 and repurchased 61,399 shares of its common stock under the Company's previously announced repurchase program.

The Company did not repurchase any shares of its common stock in the second quarter of 2021.

At June 30, 2021, the Company had 6,206,913 shares of its common stock outstanding.

Capital Requirements and Ratios

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The requirements address both risk-based capital and leverage capital.

We believe as of March 31, 2021, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

We believe as of June 30, 2021, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

The table below illustrates the capital requirements in effect for the periods noted for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements.

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The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital.

As a result, the Company has $10 million more in regulatory capital than the Bank at both March 31, 2021 and December 31, 2020, which explains most of the difference in the capital ratios for the two entities.

As a result, the Company has $10 million more in regulatory capital than the Bank at both June 30, 2021 and December 31, 2020, which explains most of the difference in the capital ratios for the two entities.

Minimum Required Capital Well-Capitalized Actual Ratio Company Actual Ratio Bank

March 31, 2021

June 30, 2021

Total risk-based capital 8.00% 10.00% 15.45% 12.65%

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We apply the same credit standards to these commitments as in all of our lending activities and include these commitments in our lending risk evaluations.

As of March 31, 2021 and December 31, 2020, the Company’s commitments to extend credit and to provide letters of credit which are not reflected on its balance sheet amounted to $375.7 million and $377.4 million, respectively.

Additionally, the Company had commitments to originate loans held for sale of $181.4 million and $150.3 million, as of March 31, 2021 and December 31, 2020, respectively.

As of June 30, 2021 and December 31, 2020, the Company’s commitments to extend credit and to provide letters of credit which are not reflected on its balance sheet amounted to $393.9 million and $377.4 million, respectively.

Additionally, the Company had commitments to originate loans held for sale of $174.0 million and $150.3 million, as of June 30, 2021 and December 31, 2020, respectively.

Since many of the commitments are expected to expire without being drawn upon, these total commitment amounts do not necessarily represent future cash requirements.

The Company has established reserves of $1.8 million and $187,000 at March 31, 2021 and December 31, 2020 respectively, for losses related to these commitments that are recorded in other liabilities on the consolidated balance sheet.

The Company has established reserves of $1.6 million and $187,000 at June 30, 2021 and December 31, 2020 respectively, for losses related to these commitments that are recorded in other liabilities on the consolidated balance sheet.

Capital Expenditures and Commitments

The Company has capital commitments related to a branch remodel and a branch relocation in Anchorage.

At March 31, 2021 the Company considers these commitments to be immaterial.

At June 30, 2021 the Company considers these commitments to be immaterial.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our assessment of market risk as of March 31, 2021 indicates that there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2020.

Our assessment of market risk as of June 30, 2021 indicates that there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis